Ambassador Event: U.S., Mexico and Canada Insights

How Arizona plays a key role in United States-Mexico-Canada Agreement (USMCA) discussions

As the largest economies in North America work to renew the United States-Mexico-Canada Agreement (USMCA), Arizona is primed to be among the states most affected by revisions.

Mexico and Canada are Arizona’s two largest trade partners, combining for about $25 billion of imports and exports annually. Over the last decade, there have been more than 50 companies between Canada and Mexico that expanded into the state, creating over $4.5 billion in capital investment and nearly 7,000 jobs. Today, Canada leads a growing segment of international companies seeking expansion into Greater Phoenix, as a record 30% of the Greater Phoenix Economic Council’s (GPEC) project pipeline comes from companies around the world.

Arizona serves as a continental gateway between the two neighbors, helping to facilitate trade not only within the U.S. but between Canada and Mexico.

“The government of Canada has realized that Arizona is the best state for us to work with Northern Mexico,” said Jérôme Pischella, Consulate General of Canada’s consul and trade commissioner. “To truly benefit from USMCA and have the three countries work together through Arizona — that’s a conscious decision.”

Pischella was one of three panelists at a GPEC Ambassador Event centered around the findings of GPEC's new International Insights Report. The discussion, focused on U.S., Canada and Mexico relationships, included conversations on USMCA, tariffs, border infrastructure and freight. The panelists were:

• Billy Kovacs, Federal Affairs Director, The Office of Gov. Katie Hobbs
• Jérôme Pischella, Consul and Trade Commissioner, Consulate General of Canada
• Shelly Zemeckis, Regional Manager, Economic and Industrial Development, Union Pacific Railroad
• Thomas Maynard, Senior Vice President of Business Development, Greater Phoenix Economic Council (Moderator)

Establishing the USMCA

The USMCA, signed into law January 2020, replaced the North American Free Trade Agreement (NAFTA), drafted under the Ronald Reagan Administration, signed in 1992 and enacted in 1994. With a goal to remove trade barriers and increase investment between the three countries, NAFTA led to the elimination of most tariffs and changed some intellectual property rights, propelling trade and deeper integration between economies. Regional trade tripled under the agreement, according to the Council on Foreign Relations.

The deal remained in place for more than 20 years before President Donald Trump announced in May 2017 intent to renegotiate NAFTA, citing the need to reshore manufacturing jobs, the trade deficit between the U.S. and Mexico, and workers’ wages and conditions, among other areas.

“The industry in 1994 has got very little in common with industry of 2015,” Pischella said. “We want it to continue. Investment likes stability. That’s one of the reason why there is so much investment [and trade] coming from Canada.”

The USMCA was finalized in September 2018 and enacted at the beginning of 2020. Since it went into effect, China has lost its hold as the top trade partner of the U.S., with Canada and Mexico taking the top two positions and making up 30% of U.S. trade. Over the last decade, more than 1,000 Canadian and Mexican companies have expanded into the U.S. market, creating nearly $110 billion in capital investment and more than 150,000 jobs.

The USMCA, designed to remain in effect until Jan. 1, 2036, includes mandatory six-year joint reviews, the first of which began in September with a public comment period.

“I think the policy is working as intended,” Maynard said. “We are relying more and more on our North American friends and having that broader reshoring initiative.”

GPEC report: U.S., Mexico & Canada Insights

Integration of supply chains

In the five years since the adoption of the USMCA, key Greater Phoenix industries like semiconductors, energy, and aerospace & defense have grown to align closer with those of the neighboring countries.

Among top exports from Arizona to Canada are agricultural products, transportation equipment, computer, electronic products and electrical equipment, and machinery. Among top imports from Canada are transportation equipment, processed foods, machinery, and computer, electronic and electrical equipment.

Similarly, Arizona’s top exports to Mexico include computer and electronic products, minerals and ores, electrical equipment, transportation equipment and chemicals. Among top imports are computer and electronic products, agricultural products, electrical equipment, transportation equipment, and machinery.

There’s a reason the imports and exports look so alike.

“Our supply chains are so intertwined and they’re so integrated that we work together constantly,” Pischella said.

“It’s very similar as far as the top commodities that are imported and exported are the same,” Zemeckis said. “(For example), when you think of the mining industry, it’s not just the metals — it’s also the inbound sulfur and acid and things that are used in production.”

Arizona serves as a connector between Canada and Mexico. The two countries make up about one-third of Union Pacific’s freight, with the Nogales border representing a key interchange with Mexico partners.

The rail, which connects 23 western U.S. states, filed to acquire Norfolk Southern in a merger that would form a transcontinental railroad within the United States.

“With U.P. having the ability now to ship all the way to the East Coast in a single-line haul, potentially, it makes this market very attractive for national distribution,” Zemeckis said.

Refine, don’t rebuild

Renewal? Renegotiation? There are many Rs mentioned in discussions surrounding USMCA.

“We like to say refinement,” Kovacs said. “Not go back to the drawing board, but really use this as an opportunity to catapult Greater Phoenix into that next area of growth.”

By refining rather than, say, redesigning or remaking or redoing, there is improved stability between the three markets. Stability is vital in world economies, helping propel the movement of goods and services while building and maintaining relationships.

“(Union Pacific is) going to adapt to whatever happens … but stability is great,” Zemeckis said. “That helps us to plan for the future, it makes traffic flow patterns a little more predictable and it also helps us establish more service … Stability helps drive that kind of decision-making as far as product offerings.”

The instability around tariffs this year has caused uncertainty. Trade talks between Trump and Canada faltered over the weekend of Oct. 25 following an advertisement from the government of Ontario that featured a clip of former President Ronald Reagan criticizing tariffs, culminating in Trump threatening new 10% tariffs. The next week, the Senate passed a vote to block tariffs on Canada, though that bill would almost certainly be vetoed by Trump if it were to get through the House.

The removal of tariffs is a primary goal from the Canadian side, Pischella said. Currently, 86% of goods and products exported from Canada to the U.S. are tariff-exempt, he said, but this does not include metals like steel and aluminum. The U.S. lacks capacity to produce enough for industry needs, particularly for automobiles, and construction of new plants is a long-term project.

“What we want to see, chiefly, in the renegotiations, is those tariffs to go away so that we stop hurting ourselves,” Pischella said.

As Greater Phoenix’s advanced manufacturing ecosystem continues to grow, with development in electric vehicles, aerospace & defense and more, normalizing trade relationships will help expand the state’s market.

The proximity, standing relationships and industrial strength of Arizona has put the state in position to expand discussions with Mexico. In October, Gov. Katie Hobbs led a diplomatic and business trade mission to Mexico City. The 35-person delegation, which included local leaders in industry, utilities and education, had opportunities to speak with the Claudia Sheinbaum Administration and meet with Mexico Secretary of Economy Marcelo Ebrard and Secretary of Foreign Affairs Juan Ramón de la Fuente.

“There’s a lot of momentum around those conversations, and the governor took not only the state’s perspective but also (perspectives) of industry and partners,” Kovac said.

Areas of discussion under the current USMCA include automotive rules of origin, agriculture and dairy market access, digital trade and data privacy — and differing regulations between nations — and general political and economic tensions. There does not appear to be a threat that the USMCA will not be renewed in some form, but a dramatic shift or failure to renew would be very troubling for North American trade.

Long-term deals create stability and help develop ongoing relationships steeped in trust. Losing trust will drive American allies to create new partnerships with other nations.

“Refinement for us means stability for those in those in this room,” Kovac said. “I think that’s really important as a message you take to either public comment, private comment, or some of the next areas of opportunity for business to articulate what you want to see.”

Read the report: U.S., Mexico & Canada Insights